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Tony Pua blogged about the value-added tax (or called goods and services tax, GST, in Malaysia).

His main contention is that a VAT will flatten the tax base in Malaysia, taxing a large part of the population that previously wasn’t taxed – fair enough. In his words:

But you have to balance that against the pain you will incur on 85% of the working population who does not pay any income tax at this point of time because their income levels are too low (and not because they are evading taxes)

While I’m conceding that the majority of the workforce fall below the treshold. But, at the same time, it is completely illogical that all 85% of those who don’t file for income taxes are legitimately below that treshold – especially considering a large chunk of our economy is informal. Teachers giving tuition classes, civil servants selling drinks at a pasar malam – that sort of thing. Rarely is such income reported.

The VAT is extremely efficient that way, slashing compliance cost and generating a new source of income.

As for(4), I fully agree that implementing GST will increase govt revenue, that’s why BN is doing it, ‘cos they’ve run out of money after wasting it in the last 10-20 years. It has bled Petronas dry and now it wants to bleed the people too.

Yes, I completely agree with Tony Pua. Which is why I think the VAT is the most ideal tax. Our corporate income tax, which is usually absorbed more by labour and consumers than investors, is already the highest in the region. As all the income tax revenue come from 15% of the workforce, squeezing more will be tough. In both cases, we may have reached or passed the Laffer curve revenue maximizing point – especially since tax competition in this region is high.

While Barisan Nasional have squandered tax and oil monies, prudent expenditure would not plug the fiscal crisis Malaysia is experiencing. A tax isn’t a tax if it isn’t painful, but Malaysia needs more taxes. And, with the rich and Petronas sponged thoroughly, we need to flatten the tax base. Though it is not to say that the government’s GST proposal is great:

Some selected items especially essential goods like rice, sugar, cooking oil and flour as well as domestic transportation would not be subject to GST.

You would think Malaysia would have learnt from McVities’ Jaffa Cakes case in the UK, they would reconsider exemptions and zero-rates on “essential goods”. McVities argued that Jaffa Cake was a cake and thus subjected to a 0% VAT, while HM Customs and Excise held that it was a chocolate-covered biscuit and therefore a luxury fully liable for the tax.

A far better solution is to have a advance rebate system. The Ministry of Finance can decide, say annually, the basic consumption of households – and give every household a periodical advance rebate on that consumption. The average low income household will not be adversely affected by the tax – as their endowment increased roughly at the same scale as their cost of living.

DAP could show leadership in this issue – more than just issuing an annual alternative budget showing roughly where savings could be made, and more than just demonstrating as in Penang how DAP is capable of stretching its ringgit. Nevertheless, DAP should not assume that Malaysia could get out of this fiscal mess simply by cutting expenditure is naïve.

P.S. Such bold-faced lies:

He said the Consumer Price Index (CPI) would not increase as a result of the GST implementation.

The sales and services taxes the GST will replace is limited. The CPI will almost definitely move up. It is a consumption tax for cryin’ out loud: who did Husni think this bold face lie will convince?

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